Power crisis: Unpaid power sector entrepreneurs unable to run business

Raghu K 49, an entrepreneur from Andhra Pradesh, is about to create history. Facing the shutdown of his 350 MW four power plants in Tamil Nadu, Raghu has sent a notice to the state utility to either clear his dues in the next three weeks or face a winding up notice.

This is the first time that an Indian power plant developer has taken such a step, where an individual unable to run his business, thanks to unpaid bills, has decided to take on the state.

Raghu has taken resort to a rarely used section in the Companies Act, (section 433) which permits a company to legal recourse for non-payment of bills of Rs 500 and more. Tamil Nadu Generation and Distribution Company (TANGEDCO), a state government-owned utility, currently owes over Rs 335 crore to Raghu. That outstanding amount is increasing by the day.

Raghu is just one of the many power sector entrepreneurs grappling with a new wave of crisis spreading across India's power sector. State-owned power utilities are once again bankrupt to the tune of Rs 70,000 crore in 2010-11, up from Rs 41,000 crore a decade ago when the utilities were given a supposedly one-time bailout.

This time though, they are threatening to drag lakhs of crores of private sector investments in the sector down with them.

Amit Kapur, partner in J Sagar & Associates and involved with the power sector, says the situation has worsened over the past decade. It is being estimated that the states should be ready to waive off Rs 1 lakh crore losses if the power story was to start afresh on a clean state. "The losses don't vanish. Lenders who have high exposures are unwilling to take any more risks in the power sector," Kapur adds.

Double Trouble

And while his biggest customer, the state utility, is unable to pay its bills, the double whammy for Raghu comes from the fact that Coal India (CIL) has told him that it can no longer supply coal to run his plant. India's power sector is facing a serious coal shortage with 48 thermal power stations out of 89 (more than half) having coal stocks of less than a week.

Raghu's plant is now being operated on imported coal as CIL had declined coal supplies, refusing to sign a fuel supply agreement with him. CIL had originally issued him a letter of intent promising to supply 30% of the coal he needed, with the balance to be imported (at a much higher cost). With CIL, going back on its promise, Raghu has decided to import all his coal requirement, which pushes up his costs by about 20% per unit.

Keeping a power plant shut was a greater loss to him than running it with operational losses. But this is where Raghu's maths went wrong. For he had not budgeted for non-payment by the consumer.

"I have sent a letter giving a 21-day notice to TANGEDCO to either pay up or face a winding up petition in the courts. I cannot run my business if my bills remain unpaid for more than four months," Raghu says speaking from his office in Hyderabad.

While TANGEDCO fails to pay bills the state has forbidden people like Raghu from selling power outside the state, to others who have deeper pockets. Such directions by a state government can only be invoked in times of emergency. "This is to be invoked only if there is a mutiny or war.

Where is the case for this?" asks Raghu who has got little help from the regulator in the state. So, while on the one hand, the state fails to pay for the electricity they buy from Raghu's plant, on the other, they stop him from selling it to some other consumer who perhaps would pay his bills.

Brief Flicker of Hope

For a while it seemed that India's power sector was shaking off its woes of the 90s. Following the reforms in the 2003 Electricity Act a new wave of investment came into the sector. Private producers have committed Rs 2.25 lakh crore worth of investments to set up over 50,000 MW of new generation capacity by 2014.

The electricity reforms however could not fix the political incentive to use the sector for patronage, such as the promise of free power to farmers.

Raghu for instance, started off with a 6.6 MW plant in Andhra Pradesh which produced biomass power from rice husk — he was allowed to sell the power directly to local consumers till the government stepped in mandating itself as the sole buyer of all power. He moved onto setting up a gas-based plant and then a captive power plant.

Currently, Raghu's company, India Bharat Power Infra, is building total power producing capacity of 2,000 MW in Tamil Nadu and Odisha, at a cost of Rs 9,000 crore. Almost 70% of this would be in the form of debt, a liability he needs to service urgently.

Raghu's predicament is only one example of the chaos in the power sector. Over the past 10 years he has moved from one area to another in the power play — beginning from renewable to captive and independent power projects — each time trying make the best of a policy to ensure that he gets paid for the electricity he sells. But each time policies changed and government rules came in with riders to prevent that easy transaction, leaving him to be short circuited in the end.

Tamil Nadu chief minister minister J Jayalalithaa has promised "free power" as one of her electoral promises. Tariffs have not been revised in the state for seven years.

Says former power minister Suresh Prabhu: "The sector needs some tough medicine if it were to sputter to a start. True costs of fuel have to be reflected in the tariffs and bills have to be paid."